CIO Insights - Deutsche BankCIO Insights Letter to Investors 1 Letter to Cracked, but still intact Investors Christian Nolting Global CIO For the moment, this is just a statement

CIO Insights

Q3 2019

Cracked, but still intact How long will markets defy the economic slowdown?

Trade conflict fears have disrupted trade chains and put a dent in global economic prospects. In response, central banks have stepped in. The Fed has said that it will “act as appropriate” and the ECB has said that, without improvement, “additional stimulus will be required”.

CIO InsightsLetter to Investors1

Cracked, but still intactLetter to Investors

Christian NoltingGlobal CIO

For the moment, this is just a statement. The global economy has yet to slow further and central banks haven’t yet cut rates. But the central banks’ commitment is an important one. Financial markets believe that policymakers’ promises will be honoured and that monetary policy intervention will blunt the market impact of slower growth.

Such central bank promises create some risks. Even though inflation remains stubbornly low, and below target, most economic data do not yet provide a good reason to cut rates shortly. But if central banks do not cut rates, their authority could start to be undermined because they have raised expectations about lower rates to the point where it would be awkward to backtrack. This may provide an incentive to cut rates more than would normally be the case – good news for markets in the short term, but not necessarily in the long term.

There is also a non-optimal solution in that central bank action is partly being used to counter the effects of an escalation in the trade dispute and the resulting shifted patterns in trade flows – thereby quite possibly prolonging trade friction longer than it might have lasted. Which direction the trade dispute goes and whether there will be new tariffs remains unclear. What we know is that the effects of a trade conflict are long-term and predictably negative; the effects of monetary easing are perhaps short-term and not predictable.

This situation has a direct bearing on our six themes for 2019, which we discuss below.

Growth deceleration – still expected, but we think that it will be rather gradual.

Vigilant on volatility – markets will be pulled around by policy uncertainty, geopolitics and corporate earnings.

(U.S.) yields on the return – the fixed income segment has posted strong returns year-to-date. At the beginning of the year we considered the short end of the U.S. yield curve to be particularly attractive. It has fared well since then thanks to falling yields, which in turn are caused by economic uncertainty and accommodative monetary policies. The upshot of lower yields across the board, however, is that the hunt for yield has intensified within all fixed income sectors, including emerging markets.

Earnings will certainly ease – due to the slowdown in economic growth, exacerbated by import tariffs eating into corporate profits.

U.S. dollar centre stage – we expect the arguments for USD weakness and USD strength to be roughly balanced in light of trade uncertainty and the projected interest rate cuts on both sides of the Atlantic.

Long-term investment themes – with ESG and enhanced infrastructure the newcomers for 2019, these themes are still a key recommendation of ours for their diversification properties.

Past performance is not indicative of future returns. Forecasts are not a reliable indicator of future performance. Your capital may be at risk. Readers should refer to disclosures and risk warnings here. Produced in July 2019.

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Christian NoltingGlobal CIO

What does this mean?

Our forecasts acknowledge that central banks have become a lot more concerned about the economic outlook, expecting momentum to slow down to the point where rate cuts are deemed to be necessary. Even though this is nothing but an expectation, financial markets have been quick to take ultra-accommodative monetary policy for granted, meaning that mere words by the Fed and the ECB have provoked a tangible reaction in equity and bond prices. We advise not to rely too much on these expectations: financial markets have a habit of over-relying on central bank support, leading to disappointment further down the road.

On the simmering trade dispute, it is by now fair to assume that it won’t go away anytime soon. An agreements of sorts between the U.S. and China may be imminent, but it’s unlikely that it will resolve all hostilities at once. To the contrary, the trade dispute has spilled over into Europe, threatening the manufacturing sector. Therefore, we should be ready for sudden spikes in volatility across asset classes. In fixed income, lower rates across the board mean that the hunt for yield is likely to intensify even further. As a result, selection becomes ever more critical. The same can be said for equities, where we advise to look for quality and scale back on cyclicals, as these will be the first to suffer as and when uncertainty increases and volatility spikes. On currencies, the USD looks solid, but not to the point of threatening the value of emerging market currencies, as it did last year. Therefore, we stick to our constructive view on Asian emerging markets. Finally, now more than ever we advise looking at long-term themes that feature a low correlation with day-to-day movements in financial markets. In particular, we highlight the potential that structural changes in the world economy offer, such as the need to maintain and upgrade ageing infrastructure in many developed countries.

In conclusion, now that half of the year has passed, our six themes for 2019 still look up-to-date as they offer a lens through which to interpret current market developments. We consider investors’ manifest belief that central banks will extend this late economic cycle indefinitely to be disingenuous. It is worth remembering that monetary policy, like so many other tools, suffers from decreasing returns of scale. That is to say, as interest rates shrink, each successive rate cut tends to have a smaller impact on the real economy. The old adage to hope for the best but prepare for the worst sounds apt in our current market environment. Our advice is to review portfolio allocations carefully, taking into account political and market risks, rather than relying on either fiscal or monetary policy to keep the economy afloat.

CIO InsightsLetter to Investors2

Instant Insights

2019 Themes

o A growth slowdown is still expected, but we think that it will be gradual.

o Look out for new quantitative easing in the Eurozone. The hunt for yield will continue.

o Long-term themes are still a key recommendation of ours for their diversification properties.


Contents

CIO Insights2019 Themes3

Theme 1Economy – Growth deceleration

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Theme 2Capital markets – Vigilant on volatility

Theme 3Fixed Income – (U.S.) yields on the return

Theme 4Equities – Earnings ease

Theme 5FX and commodities – U.S. dollar and oil centre-stage

Theme 6Long-term investment – Tech transition

GlossaryForecasts Disclaimer


Slower despite a foot on the gas

Slower global growth will not just be due to slower exports. Corporate investment expectations are being scaled back in response. Manufacturing is suffering the most: services industries are doing better for now, according to purchasing managers’ indices, but could be next to fall. Resilient consumer confidence may be challenged. Trade disruption is already causing structural shifts in trade flows and global supply chains.


So far in 2019, headline GDP growth numbers have held up well – with U.S. growth hitting 3.2% year-on-year in Q1 and Eurozone growth 1.2% year-on-year. But consensus growth expectations have shifted down sharply: in the U.S. they are at 2.5% for 2019 and 1.8% for 2020 and in Europe at 1.2% for 2019 and 1.3% for 2020. Escalating trade conflicts have triggered the general gloom.

Our central scenario remains for a measured slowdown in global and individual country growth rates, with the U.S. keeping well clear of recession: we forecast 2.5% U.S. growth in 2019, and a 3.4% global expansion. Eurozone growth, at 1.2%, will be low but positive. In Japan we expect GDP growth of 0.5% and in the UK 1.4%. China, meanwhile, will be piling on the policy initiatives to keep growth on a relatively-even keel: Chinese growth is forecast at 6.0%. India has already been busy cutting rates against some signs of slowdown: Indian growth is predicted at 7.2%.

Consumer resilience tested

Consensus gets gloomy

Theme 1Economy – Growth deceleration

Deceleration can be smooth or abrupt – and it can be voluntary or involuntary. At the start of this year we predicted easing growth, as central banks continued to gently scale back liquidity as part of long-awaited policy “normalization”.

2.5%U.S. growth in 2019

6.0%Chinese growth in 2019

1.2%Eurozone growth in 2019

7.2%Indian growth in 2019



Figure 1: Reversal in Fed rate market expectations

Source: Bloomberg Finance LP, Deutsche Bank AG. Data as of June 28, 2019.

91.8% PROBABILTY OF RATE

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Central banks respond

Central bank policies are already changing in anticipation of a slowdown. Rather than taking their foot off the accelerator, central banks are now promising (if needed) to put a foot on the gas. The Fed has the option of repeatedly cutting rates if needed: we expect it to cut the Fed funds rate twice over the next 12 months, reducing it by a total of 50 bps. The ECB and Bank of Japan have a more difficult task. Cutting already low or negative policy rates in Europe or Japan could have significant economic costs. We still expect the ECB to reduce its deposit rate by 10 bps over the next 12 months, and to accompany this move with a tiering system in order not to hurt the banking sector. The Bank of Japan is likely to mirror these actions by the end of the year with similar non-conventional policy tools. Their focus will include other policy loosening tools: in Europe’s case, damage from Brexit or Italian budget rows could add to the urgency here. China is already pursuing a multi-faceted approach to keep credit flowing.

Inflation is expected to remain low. Even in the U.S., where a buoyant labor market has helped push up wages, it is forecasted at just 1.9% in 2019. In other developed markets inflation, and inflation expectations, are both much lower. The Fed is already debating how long-term policy needs to shift in this low inflation world: any upward shock from higher tariffs is unlikely to be major.

In summary: Expect a further slowdown in global growth in the second half of this year – but no recession either in the U.S. or in Europe.

Instant Insights

Economy

o Central banks have made it clear that financial markets can count on their support.

o However, markets may have got ahead of themselves. We don't expect the Fed to deliver as many cuts as are currently priced in.

o Beware of moral hazard: once central banks are expected to step in, markets may become complacent about risks.


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The Fed turns dovishMarket-implied probability of an interest-rate hike in January 2020Market implied probability is derived from the derivatives market.

13 JUNE The Fed raises rates by 0.25%

19 DECEMBER The Fed raises rates by 0.25%

30 JANUARY Fed removes “further gradual increases” and says that it will take a “patient” approach in setting policy, indicating that it would be less likely to raise rates over the coming year

20 MARCH Fed downgrades its forecast of GDP growth in 2019 from 2.3% to 2.1%

10 OCTOBER President Donald Trump accuses the Fed of “going loco” in continuing to raise rates, criticisms that he repeats several times in subsequent months

26 SEPTEMBER The Fed raises rates by 0.25%. It

removes “accommodative” from the statement, which markets interpret

as meaning that it may be nearing the end of its rate-hiking cycle

Past the peakGDP growth has held up so far during Jerome Powell’s tenure as Fed chair, but the outlook is getting weakerGDP growth is quarterly and annualized

Better-than-expected GDP growth in the first quarter of 2019 was largely due to rising inventories and falling imports, and the headline figure disguised signs of a slowdown in both consumer spending and business investment. Meanwhile, inflation is well below target, the latest employment data was disappointing and wider fears such as the threat of a U.S.-China trade war have not gone away.

Growth in the second quarter of 2018 was the strongest result in almost four years

An abrupt fourth-quarter slowdown suggested that the economy may be losing momentum

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The certainty of uncertainty

Just as the causes of volatility are many, so are the consequences for markets. Single volatility measures cannot capture the full story. Recently, for example, growing hopes around monetary policy easing have driven volatility – on the most quoted measure, the VIX – down. But the numbers here need to be treated with caution. The VIX measure, which is of implied volatility through S&P 500 index options, addresses only one aspect of volatility and relatively low values don’t necessarily indicate calm – as we found out most recently in late 2018, before the equity market falls.


Reasons for volatility are many – both global and local. Many are interlinked – but often in different ways, with different drivers and running on different cycles.

The key recent volatility driver has been trade fears. The sharp market fall in late May was triggered by an unexpected reversal in U.S./China trade negotiations; with no comprehensive U.S./China trade deal likely quickly, this will stay the case.

Trade concerns will feed into growth fears which in turn will destabilize policy expectations. Of course, this can work both ways: increasing expectations of central bank policy loosening lifted markets in June.

Volatility could also be boosted by corporate earnings shifts: the Q2 U.S. earnings reporting season, starting in late July, will show how much current gloom reflects reality.

Finally, don’t ignore geopolitical risks, even if apparently running on a different tangent. Increasing Iran tensions in June reminded us that old tensions can reignite. Other political problems around, for example, Brexit and Italy can also have a non-economic impact.

Volatility is not just the VIX

Reasons for volatility

Theme 2Capital markets – Vigilant on volatility

Financial markets have had many reasons to be volatile since the start of the year – but not all of these have been predictable.

The Q2 U.S. earnings reporting season, starting in late July, will show how much current gloom reflects reality.

Markets have put aside fears about political and geopolitical upheaval, but these risks haven't abated.



Figure 2: VIX not a perfect predictor

Source: Bloomberg Finance LP, Deutsche Bank AG. Data as of June 28, 2019. Chart of the VIX index vs. S&P 500 level over the last 12 months.

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Views are volatile too

Another reason to be vigilant on volatility is that expectations are just expectations – and that we live in a highly uncertain environment where they could change quickly and profoundly. Financial markets will have multiple issues to fret over in the second half of this year: the impact of trade conflicts, European politics and so on could be sorely test investors’ faith in the ability of future Fed policy to put matters right. As a result, we could see a resurgence in volatility in the second half of 2019.

From a portfolio perspective, the threat of higher levels of volatility need to be addressed in various ways. Equity positions need to be reassessed, with fixed income investments focused on achieving the best balance of risk vs. potential reward. But increased cash positions should be temporary: they carry their own risks in a higher volatility environment.

In summary: Falls in volatility will be temporary and standard measures will tell only part of the story.


Instant Insights

Capital markets

o Q2 data are likely to reveal an ongoing economic slowdown.

o Therefore, financial markets may become more jittery, reacting badly to negative news.

o Beware of cash positions: they carry their own risks in a higher volatility environment.

Rates reverse


Worries about the global economic outlook, due in part to intensifying trade conflicts, have helped prompt this change of view. More dovish central banks – keen to prop up economic growth and reassure economic markets – have indicated that they are willing to intervene as needed.

We believe that the two interest rate cuts by the Fed that we expect over the next 12 months may well be accompanied by changes to its balance sheet management process. The ECB’s Draghi has hinted at a revival of quantitative easing and says the full range of other policy tools are on the table – to be deployed in the absence of improvement. The Bank of Japan may also unveil some (probably limited) policy initiatives later in the year. In many key emerging markets, central banks may also be loosening policy – but in a more conventional way via interest rate cuts.

Doves ascendant

Theme 3Fixed Income – (U.S.) yields on the return

At the start of 2019, gentle policy normalization seemed likely to ease up yields. But anticipation of further policy loosening has now pushed them down to unexpected lows, with (as of late June) U.S. 10-year Treasury yields only just above 2% and German 10-year Bund yields below -0.3% – a record low.

Figure 3: Rates under pressure: government bond yields fall again

Source: Datastream, Deutsche Bank AG. Data as of June 10, 2019.

U.S. 10-YR Treasury yields

German 10-YR Bund yields

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Hunt for yield continues

Fixed income has proved resilient so far in 2019. At the start of the year, we highlighted investment grade credit and emerging market hard currency debt as areas of opportunity and both have done well so far this year. Indeed, emerging market debt offers some of the highest yields available, coupled with healthy expectations for spreads, making this asset class attractive for investors looking for carry.

The hunt for yield will remain the dominant theme. But this should not blind investors to intrinsic risks. Italian debt, for example, is potentially a problem area. And slower global growth could cause problems for some high yield issuers, even with looser monetary policy: as we have noted before, you have to be sure that higher spreads are worth the risk. Within European credit, we think that so-called “cross-over” credit – issuers on the boundary of investment grade and high yield – could offer an attractive combination of risk and return.

Summary: Fixed income’s time in the sun is not over. Investment grade and emerging market hard currency debt will particularly appeal.

Growth fears are only part of the story. The downward trend in core government yields had been exacerbated – even before the most recent loosening – by safe-haven flows, as investors sought to move out of risky assets such as equities. But the long-term fear remains inflation: many measures of this in both the U.S. and Europe continue to fall as a result of slowing economic momentum.

In spite of lower expectations for interest rates, we do not expect an inversion in the U.S. yield curve. We have lowered our 12-month forecast for 10-year U.S. Treasuries to 2.00% and for 10-year Bunds to -0.10%. We are also now neutral on duration in the expectation that rates will not increase dramatically from current levels.

Policy debate redirected

2.00%10-year U.S. Treasuries

12-month forecast

-0.10%10-year Bunds

12-month forecast


Instant Insights

Fixed income

o Anticipation of policy loosening has depressed yields to all-time lows.

o Safe-haven flows have contributed to low yields.

o Investment grade and emerging market hard currency debt are still appealing.

Earnings under pressure


Firms and equity investors will continue to fret about trade. Even though the U.S. and China have several rounds of trade negotiations behind them and steps have been taken to reach an agreement, we don't expect a "big deal" resolution to be imminent. The tech dimension is giving rise to trade restrictions that go far beyond import duties – making this a geopolitical rather than an economic dispute. Delayed investment decisions as a result could have multiple implications, including for global consumer spending. Cars, semiconductors and industrial goods are likely to be the sectors worst hit by tariffs, but see growth potential in defensive sectors such as software, healthcare and digital payments. In regional terms we prefer U.S. equities over European equities and keep our constructive view on emerging market equities.

Equity investors may also take heart from the new reality of lower interest rates for longer. This – everything else being equal – could make equities relatively more attractive in comparison to bonds and might help sustain valuations at, or even above, historical averages.

In the event, the Q1 2019 corporate earnings season was stronger than the consensus expected. Earnings per share measures on the S&P 500 and Stoxx Europe 600 surprised to the upside. S&P 500 Healthcare and Stoxx 600 Industrials showed the strongest earnings growth – up 8.8% and 11.0% YoY respectively. However, earnings expectations had been revised downwards as we expected.

Attention now focuses on the Q2 earnings season, to start in late July. Current consensus is for a fall in S&P 500 earnings of -2.3%. Trade disputes are expected to have a growing impact. For companies with more than 50% of their sales inside the U.S., earnings growth is forecast to reach 1.4%; for companies with less than 50% of sales inside the U.S., earnings are expected to decline by -9.3%.

Trade dispute vs. interest rates

Theme 4Equities – Earnings ease

At a fundamental level, equity prices are influenced (inter alia) by two key factors – the macroeconomic environment and expectations of future corporate earnings. At the start of the year we cautioned about slower growth in both.



Staying apprehensive

Overall, we enter the second half of the year slightly more apprehensive about equity markets than we were just a quarter ago. We would focus on long-term themes and protect portfolios against downside risks.

Summary: Impact of trade woes intensifies, but low interest rate expectations provide support.

Our forecasts for the major equity market indices are given on page 19. In the case of the U.S., valuations (price/earnings) are expected to rise slightly from current levels: elsewhere, valuations are expected to fall. We therefore forecast a widening European price/earnings valuation discount to the U.S. Europe lacks a clear catalyst for a rebound, but the collapse in bond yields could support flows into high-quality dividend stocks. Sectoral issues (e.g. autos) could however limit the rise in the German DAX. We also see only small potential 12-month gains for the MSCI Japan, given expected Japanese yen appreciation, unhelpful for many Japanese corporates. Emerging markets remain vulnerable to the trade war, but attractive valuations and 2020 earnings growth expectations could still underpin gains.

Valuations diverge

Figure 4: U.S. vs. Europe valuations gap is expected to rise

Source: DWS, Deutsche Bank AG. Data as of June 2, 2019. * Price/earnings ratio, last twelve months.

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Instant Insights

Equities

o We expect lower earnings growth in 2019.

o The collapse in bond yields could support flows into high-quality dividend stocks.

o Defensive equity sectors offer growth potential in this stage of the cycle.

FTSE MIB ITALY

15.17%

Dow Jones Industrial Average

U.S.13.71%

Nikkei 225JAPAN6.30%

NSE NiftyINDIA8.53%Ibex 35

SPAIN6.99%

S&P/BMV IPCMEXICO4.03%

Topix 500JAPAN3.92%

CAC 40FRANCE16.26%

Swiss MarketSWITZERLAND16.68%

Nasdaq CompositeU.S.20.08%

S&P 500U.S.16.68%

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Shanghai Shenzhen CSI 300CHINA27.07%

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Global valuations in contextChinese stocks and U.S. tech companies have led the charge amid a solid start to the year for global markets

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Hang Seng HONG KONG

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Kospi SOUTH KOREA

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More expensive, relative to other indices

Average volume

HOW TO READ

The size of the circles in this chart is proportional to the average volume of shares traded for each index over the past 30 days. Volumes in the Shanghai Shenzhen CSI 300 index have almost doubled so far this year. The inclusion of Chinese A shares in MSCI’s benchmark World index is often cited as a key catalyst for the rally, although ebbs and flows in trading volumes on mainland exchanges remain heavily driven by sentiment among large numbers of very active domestic retail traders.

Euro Stoxx 50EUROPE15.12%

S&P/TSX Composite IndexCANADA13.86%

FTSE 100UK10.06%



U.S. dollar resilience challenged but not broken


1.15USD vs. EUR12-month forecast

107USD vs. JPY12-month forecast

Expectations of a relatively stable U.S. dollar will be a relief for the more vulnerable emerging market economies: U.S. dollar appreciation last year caused some problems. Overall, however, most emerging market currencies are becoming more resilient.

Europe and Japan are not expected – and in fact probably unable – to cut interest rates as much as the U.S. Therefore, an implied narrowing of the U.S.’s interest rate differential advantage would have been expected to hurt the U.S. dollar. This was not the case: exchange rate moves have been minimal and our 12-month targets (1.15 vs. the euro and 107 vs. the Japanese yen) are close to current levels.

The euro, of course, has its own problems in the form of continuing uncertainty around the Italian budget deficit and Brexit (which is likely to have knock-on effects beyond sterling). The Japanese yen could however gain from safe-haven flows in the current uncertain environment, as has the Swiss franc.

Emerging markets hope for stability

Stable exchange rates absorb monetary policy shift

Theme 5FX and commodities – U.S. dollar and oil centre-stage

As we expected, the U.S. dollar proved remarkably resilient in the first half of 2019, with the DXY Index (the currency vs. those of its major trading partners) staying in a tight trading range between 95 and just over 97. It proved resilient to concerns around international trade disputes and weaker U.S. growth – we consider implications of U.S./China developments in the figure on page 15.



The oil price has been centre-stage too, but major shocks have so far been averted. Prices (WTI) have been moving in a USD55-65/b range as supply and demand concerns tussle for dominance. Iran is the main supply concern, although OPEC+ supply controls could come back into focus; the assumption is that Saudi Arabia, Iraq and the UAE want to hold production at current levels for the rest of this year, but Russia’s position is unclear. News on temporary drops in the U.S. supply can move markets, but (despite falling U.S. rig counts), non-OPEC output continues to rise – keeping a lid on prices, despite geopolitical concerns.

Demand concerns are centred around slowing global growth. Behind these more immediate concerns, however, the dynamics of the oil market may be changing. Supply has become much more elastic thanks to technology advances that allows oil rigs (e.g. in the U.S.) to be opened or closed at very short notice, smoothing out swings in the oil price. This encourages our belief that demand and supply should broadly balance out: we have a 12-month target for WTI oil of USD60/b.

Summary: Exchange rates and the oil price have remained stable despite the changed economic environment.

Oil price stability

Figure 5: U.S.-China trade conflict: pluses and minuses for the U.S. dollar

Source: DWS, Deutsche Bank AG. Data as of June 1, 2019.

Positive for U.S. dollar

Negative for U.S. dollar

Issue 1: Higher tariffs on China exports

Issue 2: China's response with capital markets tools

Issue 3: Worsening of retaliatory measures

If higher tariffs push up U.S. inflation, this could discourage the Fed from loosening policy too much.

Higher U.S. domestic prices could hurt U.S. demand and thus GDP growth - encouraging rate cuts.

Renminbi weakening to offset higher tariffs would imply a stronger U.S. dollar.

Possibility of China selling U.S. Treasury holdings would be U.S. dollar negative.

If market sentiment worsens, emerging market/risk positions will be cut with "safe haven" flows returning to the U.S. dollar.

Chinese retaliatory measures affect U.S. businesses; lower growth expectations make the Fed more accommodative.


Instant Insights

FX and commodities

o We expect the U.S. dollar to keep its value in the second half of the year.

o The yen could gain from safe-haven flows, like the Swiss franc.

o Oil supply has become much more elastic, smoothing out price swings.

The case for Infrastructure and ESG


Infrastructure demonstrates that such long-term themes have immediate implications for the present, as well as the future. Infrastructure is a term often associated with the developing world, but this image is out of date and misses much of the story. Note that in the developed world, significant chunks of essential infrastructure date back to the postwar economic boom of the 1950s and 1960s. Many bridges, airports and tunnels and so on are now due for replacement: the flip-side of the boom is that we face obsolescence en masse, meaning that a disproportionally high percentage of our infrastructure needs to be renewed or replaced at once.

Meanwhile, spending continues to lag requirements. An estimated USD79 trillion is expected to be spent globally on infrastructure through to 2040 against the USD94 trillion required. As a percentage of GDP, countries are spending around 3% of GDP on infrastructure, instead of the required 3.55%.

Infrastructure spending needs to catch up

Theme 6Long-term investment – Tech transition

We have been suggesting to investors that they recalibrate their portfolios, with one option being to focus equity holdings on long-term themes. Our long-term themes of cybersecurity, millennials, health care and infrastructure (launched in 2017) have been complemented by themes around smart mobility and artificial intelligence (2018) and then environmental, social and governance-based investment (ESG) and enhanced infrastructure (2019). We focus on these two themes here.

Tech is closely linked to infrastructure: it represents a sizeable portion of the investment needed to build railways, airports and so forth, even though traditionally it is not seen as part of the infrastructure sector. So, a narrow focus on construction may miss out on substantial investment opportunities. The financing of infrastructure investment is often a hybrid between public and private investment, also opening up interesting opportunities for investors.

Infrastructure has a tech component



Figure 6: Number of ESG regulations is increasing

Source: MSCI ESG Research, UN PRI, Deutsche Bank AG. Data as of January 2019.

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ESG regulations increasing fast

Within ESG investments – that take environmental, governance and social criteria into consideration – we see specialization shaping up to be one of the main trends in the immediate future. Thanks to better knowledge, investors are increasingly able to pick different sorts of strategies such as impact investing or ESG integration for their portfolios instead of simply relying on exclusion filters. Another trend that is more and more guiding ESG investments is regulation, which increased incrementally last year. Investors would do well to anticipate future regulation by being selective in companies they invest in, as more and more non-financial criteria determine the financial wellbeing of listed companies. Companies that excel at sustainable growth tend to feature positive track records, benefit from good reputation and often have a strong market position compared with their peers. Finally, newer innovative firms tend to have a competitive advantage thanks to new technologies, typically are able to exploit vast markets and benefit from increasing scalability of their business, i.e. higher profitability as their market expands.

Summary: Long-term investment themes are a good portfolio diversification in uncertain times. We reiterate our constructive view on ESG and infrastructure.

Investors

Investors and issuers

Issuers


Instant Insights

Long-term investment

o Developed countries are in need of infrastructure investment just as much as developing ones.

o A hidden but substantial part of infrastructure spending goes towards technology.

o Regulation in the ESG space represents challenges as well as opportunities.

Please see risk warnings for more information. Forecasts are based on assumptions, estimates, opinions and hypothetical models or analysis which may prove to be incorrect. No assurance can be given that any forecast or target will be achieved. Past performance is not indicative of future returns. * For the U.S., GDP measure is calendar year and inflation measure is Core PCE Dec to Dec %. Forecast for U.S. Headline PCE (Dec/Dec) is 1.9% in 2019 and 2020. U.S. GDP Q4 on Q4 growth is 2.1% in 2019 and 1.9% in 2020.Source: Deutsche Bank AG. As of June 25, 2019.

CIO InsightsForecasts18

Macroeconomic forecasts

2019 Forecast 2020 Forecast

GDP growth (%)

U.S.* 2.5 2.0

Eurozone (of which) 1.2 1.2

Germany 0.9 1.2

France 1.2 1.2

Italy 0.2 0.5

UK 1.4 1.5

Japan 0.5 0.6

China 6.0 6.0

India 7.2 7.5

Russia 1.5 1.5

Brazil 1.5 2.0

World 3.4 3.4

Consumer price inflation (%)

U.S.* 1.9 2.0

Eurozone 1.4 1.3

UK 1.8 2.1

Japan 0.9 1.7

China 1.5 1.8

Current account balance (% of GDP)

U.S. –2.7 –2.6

Eurozone 2.9 2.9

UK –3.5 –3.2

Japan 3.8 4.1

China 0.6 0.2

Fiscal balance (% of GDP)

U.S. –4.4 –4.4

Eurozone –0.8 –0.7

UK –1.8 –1.4

Japan –3.1 –2.4

China –4.8 –3.8

F = Forecasts. Please see risk warnings for more information. Forecasts are based on assumptions, estimates, opinions and hypothetical models oranalysis which may prove to be incorrect. No assurance can be given that any forecast or target will be achieved. Past performance is not indicative offuture returns.Source: Deutsche Bank AG. As of June 25, 2019.

CIO InsightsForecasts19

Asset class forecasts

Benchmark interest rates Official rate End-Jun 2020FU.S. Fed fund rates 1.75%-2.00%Eurozone Refi rate 0.00%UK Repo rate 1.00%Japan Overnight call rate 0.00%

FX Official rate End-Jun 2020FEUR vs. USD EUR/USD 1.15USD vs. JPY USD/JPY 107EUR vs. JPY EUR/JPY 123EUR vs. GBP EUR/GBP 0.88GBP vs. USD GBP/USD 1.30USD vs. CNY USD/CNY 7.0

Equities Market Index End-Jun 2020FU.S. S&P 500 3,000Germany DAX 12,300Eurozone Eurostoxx 50 3,370Europe Stoxx 600 380Japan MSCI Japan 970Switzerland SMI 9,450UK FTSE 100 7,220Emerging Markets MSCI EM 1,080Asia ex Japan MSCI Asia ex Japan 680

Commodities Market Index End-Jun 2020FGold Gold spot 1,400Oil WTI spot 60

Fixed Income Market Index End-Jun 2020FU.S.

UST 2yr U.S. 2yr yield 1.70%UST 10yr U.S. 10yr yield 2.00%UST 30yr U.S. 30yr yield 2.50%U.S. IG CORP BarCap U.S. Credit 105bpU.S HY Barclays U.S. HY 440bp

EuropeSchatz 2yr GER 2y yield –0.70%Bund 10yr GER 10y yield –0.10%Bund 30yr GER 30y yield 0.40%Gilt 10yr UK 10y yield 1.50%EUR IG Corp iBoxx Eur Corp all 90bpEUR HY ML Eur Non-Fin HY Constr. Index 380bp

Asia PacificJGB 2yr JPN 2y yield –0.05%JGB 10yr JPN 10y yield 0.15%Asia Credit JACI Index 265bp

GlobalEM Sovereign EMBIG Div 330bpEM Credit CEMBI 300bp

The Bank of Japan (BoJ) is the central bank of Japan.

Brexit is a combination of the words "Britain" and "Exit" and describes the possible exit of the United Kingdom of the European Union.

Bunds are longer-term bonds issued by the German government.

The CAC 40 is the main reference equity index for France. It is a capitalization-weighted index that consists of 40 of the largest stocks listed on Euronext Paris.

CNY is the currency code for the Chinese yuan.

Core or underlying inflation refers to a measure of inflation which excludes some volatile components (e.g. energy). These excluded components can vary country by country.

The CSI 300 Index is the main reference equity index for China. It is a capitalization-weighted index that consists of 300 of the largest stocks listed on the Shanghai and Shenzhen stock exchanges.

The DAX is a blue-chip stock-market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange; other DAX indices include a wider range of firms.

The Dow Jones Industrial Average is one of the main reference equity indices for the USA. It is a price-weighted index that consists of 30 of the largest stocks listed on the New York Stock Exchange and the Nasdaq.

Earnings per share (EPS) are calculated as a companies' net income minus dividends of preferred stock all divided by the total number of shares outstanding.

ESG investing pursues environmental, social and corporate governance goals.

The European Central Bank (ECB) is the central bank for the Eurozone.

The EuroStoxx 50 Index tracks the performance of blue-chip stocks in the Eurozone; the Stoxx Europe 600 has a wider scope, taking in 600 companies across 18 European Union countries.

The Federal Reserve is the central bank of the United States. Its Federal Open Market Committee (FOMC) meets to determine interest rate policy.

The FTSE MIB Index is the main reference equity index for Italy. It is a capitalization-weighted index that consists of 40 of the largest stocks listed on the Borsa Italiana.

The FTSE 100 Index tracks the performance of the 100 major companies trading on the London Stock Exchange.

Gilts are bonds that are issued by the British Government.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

The Hang Seng Index is the main reference equity index for Hong Kong. It is a capitalization-weighted index that consists of 50 of the largest stocks listed on the Stock Exchange of Hong Kong.

Hard currency debt, in an emerging markets context, is debt issued by a country that is denominated in a major global currency (usually the USD). Local currency debt is denominated in the currency of the issuing country.

The IBEX 35 is the main reference equity index for Spain. It is a capitalization-weighted index that consists of 35 of the largest stocks listed on the Bolsa de Madrid.

The JP Morgan Asia Credit Index (JACI) measures the total return of the Asian dollar-denominated bond market.

The Korea Composite Stock Price Index (KOSPI) is the main reference equity index for South Korea. It is a capitalization-weighted index that consists of all the common stocks listed on the Korea Exchange.

CIO InsightsGlossary20

Glossary

The NASDAQ Composite is one of the main reference equity indices for the USA. It is a capitalization-weighted index that consists of all the common stocks listed on the Nasdaq.

The Nikkei 225 Index is one of the main reference equity indices for Japan. It is a price-weighted index that consists of 225 of the largest stocks listed on the Tokyo Stock Exchange.

The NSE NIFTY 50 Index is one of the main reference equity indices for India. It is a capitalization-weighted index that consists of 50 of the largest stocks listed on the National Stock Exchange of India.

The Organization of the Petroleum Exporting Countries (OPEC) is an international organization with the mandate to "coordinate and unify the petroleum policies" of its 12 members.

Price/earnings (P/E) ratios measure a company's current share price relative to its per-share earnings. In this context, LTM refers to last twelve months' earnings.

Quantitative easing (QE) is an unconventional monetary policy tool, in which a central bank conducts a broad-based asset purchases.

The S&P/BMV IPC is the main reference equity index for Mexico. It is a capitalization-weighted index that consists of 35 of the largest stocks listed on the Bolsa Mexicana de Valores.

The S&P/TSX Composite Index is the main reference equity index for Canada. It is a capitalization-weighted index that consists of 250 of the largest stocks listed on the Toronto Stock Exchange.

The S&P 500 Index includes 500 leading U.S. companies capturing approximately 80% coverage of available U.S. market capitalization.

A spread is the difference in the quoted return on two investments, most commonly used in comparing bond yields.

The Swiss Market Index (SMI) is the main reference equity index for Switzerland. It is a capitalization-weighted index that consists of 20 of the largest stocks listed on the SIX Swiss Exchange.

The Tokyo Stock Price Index (TOPIX) 500 is one of the main reference equity indices for Japan. It is a capitalization-weighted index that consists of 500 of the largest stocks listed on the First Section of the Tokyo Stock Exchange.

Treasuries are bonds issued by the U.S. government.

Valuation attempts to quantify the attractiveness of an asset, for example through looking at a firm's stock price in relation to its earnings.

The yield curve shows the different rates for bonds of differing maturities but the same credit quality.

CIO InsightsGlossary21

Glossary

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